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The three stupidest economic fallacies

It’s possible readers will come up with some economic myths that are even stupider than the three I will mention here, but these are the three rattling around in my brain right now.

1)We need to bail out Greece to help poor Greeks. This has to be the stupidest, but it is everywhere. No, the people who are getting the bailouts are rich bankers and the European Central Bank. The people who will suffer are the poor and middle class Greeks and of course any Greek taxpayers.

You have seen the rioting in Greece on TV, right? Why are they rioting? Well, many are anarchists who just love an opportunity to riot, but there are some people who are very upset over the Greek austerity plan. The reality is that Greek has a lot of debt for the same reason we do: government is too big and has been promising too much for too long to too many people. But the dirty secret is that the European Central Bank, and other private bankers, are the real people getting the bailout. The ECB may be exposed to about half of Greece’s total $500 billion in debt.

Sorry folks, when you loan somebody money you are taking a risk they will default and not pay. You need to take responsibility for that risk. The debt needs to be renegotiated, and the bond holders need to take a haircut, meaning they lose some money. But the ECB does not want to do this because they took the risk and there are worries about the ECB going bankrupt.

The real losers are the Greek people. Their only solution is to tell the ECB to take a hike, default, renegotiate the debt and take some short-term pain (austerity, big cuts in government) for long-term gain (clearing the markets, economic growth again). Bonds at 15 percent mean economic pain in the long run for Greeks whose taxes will have to pay off those bonds later on. (Bonds are at that level because nobody would buy a bond at a lower yield given the Greek debt levels). So, today Europe is bailing out bankers and rich people on the backs of the poor and middle class Greeks. Not so good.

2)“China is raping this country.” This statement from Donald Trump has to be one of the stupidest things ever said by an American public figure and potential politician. If anything, China is saving our behinds. China is lending us money by buying our bonds because nobody else will. China is making stuff less expensively so it can be sold at low prices to people at Wal-Mart and elsewhere. China is a fierce competitor in some areas, which is good for American business because competition makes us stronger.

If anybody has a complaint, it is China. We are the ones who have sent troops to areas near the Chinese border (Vietnam and North Korea). We are the ones to threaten to invade China (MacArthur). We are the ones who interfered in China’s internal affairs during their civil war by siding with Chiang Kai-Shek. Meanwhile, China has sent us some of their best people to build our railroads and to be great engineers, businessmen and doctors.

Over time, China has made reforms that have helped lift literally hundreds of millions of people out of poverty. China has opened to U.S. industry and now buys $90 billion worth of U.S. stuff a year (in 2010). Yes, we have a trade deficit with China, but our trade deficit with Germany is also out of control, yet nobody says Germany is raping this country.

China’s currency is manipulated by the government, and the complaint is that this prevents fair trade. But how about the U.S. policy of buying our own debt and encouraging inflation, which is destroying the U.S. dollar and making our products artificially cheaper? This policy also ensures that Chinese bond holders suffer because the inflation rate is higher than the yield on their bonds. We are technically defaulting on our bonds with China already because they are losing money on them (compared to the inflation rate). All of this can be directly traced to U.S. monetary and fiscal policy.

Don’t get me wrong: I am not defending all Chinese policies. There are reasons to be concerned about Chinese expansionism, and it is silly for China to continue to prop up the North Korean regime. Nobody can defend the forced abortions and political prisoners in China. But at the end of the day, these are internal Chinese issues. China is a growing trading partner and competitor. This is good for everybody.

3)Obamacare will lower the deficit. I don’t think anybody actually believed this, but of course this was a main selling point for Obamacare during 2009 and early 2010. The idea that a new entitlement would be free and actually save money was so silly as to not be taken seriously except by the worst partisans, but nevertheless we heard this a lot during the Obamacare debate.

Hopefully we can finally put this canard to rest. Here is one explanation. The bottom line: Obamacare was “scored” over 10 years in which the taxes came first and the benefits came later. This accounting trick forced the CBO to calculate costs and benefits in ways that skew the numbers. Obamacare is also supposed to be funded with taxes that are very likely to be repealed by later Congresses because they are unpopular even with Democrats and unions (such as the tax on Cadillac health plans, which are primarily given to union members).

A report released by the CBO just a few days ago shows that medical costs are exploding and Obamacare does absolutely nothing to stop the trend. Meanwhile, we are supposed to provide health insurance to tens of millions of new people and think we are somehow lowering health care spending?

If you favor Obamacare, you are on safer ground arguing in favor of health care for more people. But I’d be willing to bet what you really want is a single-payer system, not Obamacare. Just as I said repeatedly during the Obamacare debate, it solved absolutely nothing it claimed to solve. As the years roll by, we will see that health costs continue to soar and people continue to complain about the system. And now with Obamacare and more government involvement, we get more debt and the likelihood of fewer and fewer doctors as they leave medical care at the worst possible time.

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About Geoff B.

Geoff B graduated from Stanford University (class of 1985) and worked in journalism for several years until about 1992, when he took up his second career in telecommunications sales. He has held many callings in the Church, but his favorite calling is father and husband. Geoff is active in martial arts and loves hiking and skiing. Geoff has five children and lives in Colorado.

19 thoughts on “The three stupidest economic fallacies”

Despite what the Wall Street Journal says (and it makes a habit of misrepresenting CBO reports) CBO says nothing about whether Obamacare will do anything to stop the trend. It is agnostic on the question, and assumes no effect because it has no data to support an estimate of how the legislation would affect health care costs. Here’s the key explanation from page 36 of their report (from which the WSJ pulls an extract out of context).

Looking beyond the next two decades, projecting the impact of the legislation on federal health care spending is very difficult because the uncertainties involved are so great. Consequently, CBO’s approach in formulating the longer-term projections in this report has been to incorporate the projected effects of the legislation on the level of federal spending for health care over the next one or two decades (depending on the scenario) and to extrapolate such spending beyond those periods using the same growth rates that would have been applied in the absence of the legislation. The use of that mechanical approach reflects CBO’s judgment that the agency does not have an analytic basis for projecting the effects of the March 2010 health care legislation on the growth rate of federal health care spending over the very long term.

Which reminds me of my favorite economic fallacy–that tax cuts pay for themselves. Unlike the health legislation, there is an analytic basis for that conclusion. Even Greg Mankiw at his most wildly optimistic couldn’t make that case–except in very unusual circumstances, they always lose revenue.

Actually, the greatest economic fallacy is at the heart of classical microeconomics–that people make rational choices and that demand arises from those rational choices.

One clear example: tomatoes. The inedible pink-colored things grown on industrial farms are not the result of any rational choice made by a consumer, and saying that they’re produced because “people want tomatoes” misses the point. Nobody who’s ever had a real tomato would “want” one of them.

How about: we can fight two wars and not pay for them? We can offer prescription drugs to seniors and not pay for them? We can cut taxes for the wealthiest among us and that will somehow magically make us wealthier? Who said “deficits don’t matter”? Oh yes, it was that notable liberal, Dick Cheney.

Aaron, you’re right on the first two but not on the tax cuts. I suppose I should address this because LL and you both mentioned this.

Economic growth is what brings prosperity. It helps the poor most of all (poor were the best off during the late 90s when the economy was booming because they became part of the workforce and got pay raises as businesses competed for workers). So economic policy should concentrate on growth.

Growth happens when the rules are predictable, there is relatively little regulation and when businesses see a new opportunity for investing or when rich people use money to invest in things. This is the single most predictable and true economic result of the last 90 years.

After World War I, the Harding-Coolidge admins lowered taxes, govt spending and regulation and caused the 1920s boom. After World War II, the Republican Congress passed tax cuts and decreased government spending and caused the a boom for most of the next 14 years or so. When the economy stalled in the early 1960s, JFK lowered taxes and caused the 1960s boom. Reagan set the stage for the 1980s boom. And yes Clinton lowered the capital gains rate (which affects those evil rich people most of all) and helped the 1990s boom. The Bush tax cuts actually partially succeeded from 2003-2007 before our most recent crisis, but they were not completely successful for the reasons Aaron mentions, ie, Bush did nothing to control the size of government overall and in fact spent like a madman.

Obama has lowered some taxes (the soc sec payroll taxes this year) and kept the Bush tax cuts but also raised other taxes (Obamacare includes more than a dozen tax hikes that can be found here:

So, if there is one economic truth you should take to the bank, if you lower taxes on the rich and create conditions for investment, it will actually help the economy. Nothing has been more provable over the last 90 years or so since this, and this is why even many of Obama’s advisers believed it and encouraged him to sign the Bush tax cut extension and lower the soc sec payroll tax this year.

And to answer a question that readers may have, what should Obama do to help the economy right now? The economy has been in free-fall or stagnation for the last three years now, so what should be done?

Again, the answer is pretty simple: create the conditions where capital investments will bring predictable returns. So, he should take his own deficit commission’s suggestion and lower both the individual and corporate tax rates but increase the base by getting rid of some deductions. This would increase revenue but signal to investors that America is a safe place to do business again. He should have a temporary tax holiday on foreign profits stuck overseas (because of our ridiculously high corporate tax rates). Repealing Obamacare and Dodd-Frank would be huge steps in the right direction, but this will not happen, so efforts should be made to overcome the worst provisions of these laws in the short term. And he should put a two-year moratorium on new regulations being emitted by all of the bureaucrats in Washington.

In the debt limit talks happening right now, the president needs to agree to deep, immediate cuts in spending and some kind of cap and balanced budget for the long term. This would send a signal to the worldwide market that the U.S. is a safe haven for investment, and money would flood here from unsafe places like Europe and Latin America.

If Obama had done these things a year ago, the economy would be growing nicely right now and he would be heading to an easy reelection.

Geoff What a novel theory of debt: Paying off the lender only supports the lender not the debtor. Actually most people believe that being able borrow is a benefit and if the only way a lender will get their money is through a some unknown or risky intervention then future lending may not be so attractive.

Al, would you buy Greek debt? If the answer is yes, then you need to do some homework. If the answer is no, then why? Well, the answer is that the likelihood you won’t get paid back is high. The ECB bought Greek debt with the explicit expectation it would get bailed out. This is called in the economic world a “moral hazard.” If you make a risky investment, the risk is on you, not on another agency that will bail you out. Bailouts only encourage people to make investments they would never make in the first place.

Craig, like many other Mormon blogs we discuss all kinds of things here. If you are defining M* as a Mormon-only blog where we discuss only Mormon-related or religion-related subjects, well, that is not a definition that anybody here accepts. Bruce’s CO2 posts have nothing to do with that “central theme” either. Mormons have a wide variety of interests. If you don’t like it, just skip on down to the next post. Thanks.

do you still think (or did you ever think) that Obamacare will lower the deficit?

Not as it stands (although only the CLASS act piece really worries me). What I thought was that by passing it, Republicans would get the message that refusing to bargain in good faith was a losing strategy. If Republicans were willing to buy into the basic structure (i.e., an individual mandate, subsidies for the poor, and requiring insurance companies to take all comers–per Romney), they could have gotten Medicare (per Ryan) and Medicaid (per Wyden-Bennett) into the same structure. If they were willing to put their weight behind taxing employer-provided health insurance (per McCain), they could have avoided the additional HI taxes on the wealthy and the Cadillac tax. And tort reform was available to the President as a bargaining chip too.

These deals are still available for the making, and they would reduce the deficit over the long term. But the Republicans obviously did not get the message. So I was wrong on that.

LL,
I have to chime in on this thought… “What I thought was that by passing it, Republicans would get the message” so we pass bills, which accomplish almost none of the outcomes people wanted, and was opposed by a majority of the US (or at the very least 50%), we write thousands of pages which no one has read, which will result in hundreds of thousands of pages of new regulations, force compliance on to thousands of businesses, and then give waivers absolving compliance to the thousand that have connections, publicly claim to cut “out of control” doctors’ and providers’ pay and then refuse to actually follow through, simply to send a message?

When the Congress wants to send a message they have a means for that. And it does not involve passing bills that we have to pass in order to “find out” what exactly we’re passing…

LL, I think a better message would have been to do what George McGovern said and propose a simple bill saying: “Medicare will now cover all Americans.” This is what liberals/progressives really wanted anyway. Would it have passed? Probably not, but it would have been out there as a simple alternative. Obamacare was a horrible political move for liberals/progressives. It will not work and it is a classic example of “government out of control.” Single-payer is something people can understand. (Full disclosure: I say this as somebody who will oppose single payer with every fiber of my being, but simply speaking as a political analyst — you can take my comments with a grain of salt if you like.)

But I am glad you agree with me that Obamacare will not lower the deficit.

Craig, you have never heard anybody say that the Greek bailout was a good idea, that China is raping us and that Obamacare lowered the deficit? Even on TV/Radio, on the internet, on news sites? I find that hard to believe.

I say this as somebody who will oppose single payer with every fiber of my being

Then you should be pushing for the individual mandate to be upheld. If it is overturned, but the (popular) requirement that insurance companies take all comers remains in place, look for the following sequence of events:

1. Healthy people drop their insurance, believing that they can still get coverage when they need it;
2. Insurance companies raise their rates to compensate for the loss of premiums from the healthy people;
3. Sick people drop their coverage because they can’t afford the higher rates;
4. Everybody demands that the government step in to fill the resulting insurance void, leading to–you guessed it–a single payer system.

LL, I will admit that is a very possible scenario, as sick to my stomach as it makes me. Not much I can do to “push” for anything, given that this issue will be decided by the Supreme Court.

The individual mandate is evil for a variety of reasons. At the very least, people should have choices. I should have had the choice to opt out of Social Security when I was 18, and I should have the choice to opt out of Medicare and Medicaid also. Forcing people to buy health insurance or face a fine is evil, pure and simple. Instead, tell us we can’t get any government-financed health care and can’t go to an emergency room unless we pay. Garnish our wages, make us go into bankruptcy, but don’t force people to buy a product we don’t want. The slippery slope of this should be obvious. When a future Congress declares that all people need to be within five percent of their ideal body weight or must go to the gym, we will all be wondering how we got there, and it starts with Congress thinking it can order all people to buy a product.

A better result, and one that I am “pushing” for, is to go the opposite direction and get the government out of health care as much as possible. I am hopeful that people will see how the best health care is that where the government is not involved (lasik surgery, for example). So, that is the direction I personally will go.

So, in your very possible scenario above, instead of 4 — everybody demanding the govt step in – I am hoping for 4a, which is the government begins to pull out of health care altogether because we simply don’t have the money to pay for your 4. I guess we’ll see how things play out.

Geoff, Greece must be able to issue debt in the future in order not to collapse. With the right premiums and guarantees I could conceivably by Greek debt. Greece benefits from bailouts and guarantees. By the way so do you.

Having said that, I am not in favor of bailouts or guarantees. Greece needs strong medicine. But they will “benefit” from a bailout.